In-depth analysis of MEV and MEV-Share.

2023-04-25 14:00

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Source: @NintendoDoomed on Twitter

Flashbots recently released Mev-Share, marking a new era for this field. MEV is expected to contribute no less than 70% of ETH Staking revenue during the bull market, which may be the next LSD-level track? This thread will bring you an in-depth analysis of MEV and Mev-Share, as well as prospects for the MEV track.

MEV & MEV-Share

The so-called MEV (Maximal extractable value MEV) refers to the maximum value that validators can extract by manipulating transactions and transaction order in a block.

For example, take the Uniswap and Sushi price difference arbitrage trade below. ICE bought for 6.17E on Uniswap was sold for 8.73E on Sushi, with 2.52E paid to Builder and only a meager profit of 0.03E left after subtracting 6.17E, 2.52E, and 0.01E (Gas) fees. Builder is expected to contribute to Validator in the end.

The question is, why do we need to offer tribute? It's because the order is "decided" by validators (this description is for easy understanding and not entirely accurate). It's public knowledge that the price on Sushi is higher than on Uniswap, so naturally a large group of people (searchers) are trying to take advantage of this opportunity and make the trade. However, the validator who holds the power decides who gets to be at the front of the line to make the trade, so they naturally have the upper hand. Through this manipulation, they achieve maximum MEV profits. In order to get the validator (previously a miner before the merge) to put them at the front of the line, ETH has become a dark forest, with searchers raising gas fees. When multiple searchers submit the same transaction, only one can be executed, resulting in a lot of wasted resources.

Searcher and Miner collaborate privately. Miner even directly cuts out the middleman to make a profit by submitting Searcher for arbitrage trading and replacing it. In short, it is the image below:

For users initiating transactions, they are also troubled by issues such as sandwich attacks (commonly known as "clamps"). DEX transactions require setting a slippage, for example, if the current price of ETH is 1000 USDC and you set a 1% slippage for buying, then even if the price reaches 1010 USDC, you can accept it. Searchers can buy the price up to 1008 and sell it for profit after you complete the transaction at 1010 USDC, which increases your buying cost.

Flashbots quickly grew stronger in this situation, giving Searchers an opportunity to reach private consensus. Everyone can use Flashbots' auction to determine the order of transactions without spending unnecessary money before going on-chain. Users initiating transactions can also give them to Flashbots instead of broadcasting them publicly to avoid being sandwiched. Once these transaction information becomes exclusive to Flashbots, the MEV income from these transactions also becomes exclusive to Flashbots, making it even stronger, a win-win situation.

As for MEV-Share, it refers to users providing their transaction information to Flashbots. The MEV revenue generated from this transaction will be returned to the user at a rate of 90%. Of course, front-running is not allowed, so it's not about being sandwiched and then getting a portion of the profit. Instead, it's about compensating for the losses you incurred, such as when you directly manipulate the price in a small DEX trade and someone else profits from arbitrage after you, you can receive 90% of the profit.

For example, this old brother tragically traded $0.05 for $2M worth of 3CRV due to a mistaken operation. The arbitrageur almost bought $2M worth of 3CRV without any cost. If he used MEV-Share, he might be able to get back $1.8M immediately.

For all parties involved:

1. Users can avoid sandwich attacks and reduce losses from accidentally spending money by using Flashbots.

2. Flashbots has obtained exclusive information, which gives them a greater profit margin compared to others.

3. Searchers can save money and get more transaction information by using Flashbots.

More users bring more exclusive trading information, more exclusive information brings greater profit space, and greater profit space brings more profit return space to users. In this way, Flashbots can gain more users and Searchers through economies of scale.

MEV Outlook

As shown in the figure below, we can see that since the Merge, EL APR mainly based on MEV revenue has accounted for about one-third of the total revenue of stETH, and during the peak of network activity, the proportion even reached nearly 70%. During the bull market, MEV revenue accounting for 70% of the total Staking revenue may become the norm, and the market size of this area is very considerable.

Adding to the aforementioned, this business also has significant economies of scale, so the profits that can be earned from top projects may be comparable to LSD, meaning it could be a LSD-level track. Additionally, since MEV revenue will experience non-linear growth during a bull market, the sky's the limit.

Since Merge, the proportion of blocks submitted through Flashbots is nearly half, and its dominance is even stronger than Lido. After all, although Lido occupies 70% of the LSD share, it only accounts for 30% of the overall Staking.

Flashbots co-founder @hasufl is also an advisor to @LidoFinance, with a strong background, but has not yet revealed much information about the issuance of coins. Mev-share has already built the foundation for rapid growth, and competitors who fork and issue coins to compete may also get a share of the pie, but this technology barrier is relatively high, which is like comparing heaven and earth with LSD Fi.

In addition, Flashbots has not yet implemented decentralization, and there are many other issues that need to be resolved, so there is still considerable space and opportunity left.

Summary

MEV has a broad prospect in the industry and is currently in its early stages. Flashbots has a strong dominance, and Mev-share has built a foundation for its rapid growth, but there should still be many opportunities for the future political system.